Sunday, March 25, 2012

U.S. Markets Rebound on Euro Strength and Energy Sector

U.S. stocks rose on Friday on a stronger euro, as well as strength in the energy and base metals sectors. The S&P 500 gained 4.33 points or 0.31% to 1,397.11. The Dow rose 34.59 points or 0.27% to 13,080.73. For the week, the S&P 500 fell 0.5%, while the Dow dropped 1.2%. It was only the second week this year that the S&P 500 had a down week.

China Growth Concerns Drag Markets

For much of the week, concerns about economic growth in China dragged on markets. On Monday, China's Department of Finance announced that in the first two months of this year, revenues at state-owned companies fell 10% versus 2011. This resulted in sharp losses in the Hang Seng index in Hong Kong and indices in China.

On Thursday, HSBC's China PMI showed a reading of only 48.1 for March, which was lower than the 49.7 in February. It was also the lowest reading in 4 months. Within the index, new orders in March had a reading of only 46.1, lower than the 48.5 in February. Meanwhile, new export orders in March was also below 50, with a reading of 48.7, but was higher than the 47.5 in February. The PMI reading pushed U.S. markets lower on Thursday.

Looking Ahead to Next Week

The relief rally that North American markets experienced since the start of 2012 is clearly over. The market is either in a pause or a pull-back. Markets will likely continue to be dragged lower next week by news from China. On Saturday, China's banking regulator told banks that they had incorrectly classified around 20% of their loans to local governments into the safest category of loans. The re-classification of these loans would require more loan-loss provisions to be set aside, reducing the net income of banks. Thus, that would push banks' share prices and Chinese stock indices lower.

In addition, high energy prices will likely neutralize gains in the US market. On Friday, Brent crude settled at above the $125 mark, at $125.13/barrel (up $1.99). Meanwhile, WTI rose $1.52 to settle at $106.87/barrel. With the summer driving season around the corner, the effect of high energy prices on the economy will be more clearly felt in the coming weeks.